What defines the situation today is a growing realization across all Eurasia from Beijing to Moscow, from Alma Ata to Ankara that the pillar of the postwar order, the United States has become an increasingly incalculable partner and force in world economic and political affairs. Some even within the US speak of a terminal decline in American influence over the coming decades, with terms such as ‘imperial overstretch.’ It’s essential to understand the extent and nature of the current economic and financial crisis of the Dollar System if we are to make any serious calculation of the future.
The crisis which broke in August 2007 as a crisis in the sub-prime or high-risk segment of US real estate credit was in fact a first manifestation of a process of debt destruction which is bringing the United States into a new Great Depression, one that will last at least a decade, perhaps several. In its severity it will be far worse than that of the 1930’s. Today the USA is the world’s greatest debtor economy. In 1929 it was the largest creditor. Today the USA public debt is over $11 trillion, growing at the fastest rate in history. The Federal deficit this year is estimated to exceed $1.8 trillion as the Treasury pours money into a bankrupt banking system to try to rescue a collapsing Dollar System. In 1929 US Public Debt was insignificant.
Since Washington abandoned the Bretton Woods Gold Exchange Standard convertibility in August 1971 it has been accepted wisdom in Washington that, as Dick Cheney put it, ‘deficits don’t matter.’ So long as the dollar was world reserve currency and the US was the greatest military power, the world would support the dollar. That era appears to have ended. The trade surplus economies of Asia, above all China are becoming increasingly concerned that the value of their dollar investments in US debt will depreciate as the volume of debt needed continues to soar.
In recent months China has begun exploring alternative investment avenues to replace their dollar investments. Russia and Brazil, seeking to reduce their dependence on the dollar, plan to buy $20billion of SDR bonds from the IMF and diversify foreign-currency reserves. Russia’s central bank said it may cut investments in US Treasuries, currently estimated at $240billion, and China says it may reduce reliance on the dollar and US bonds. China today is America’s largest foreign creditor.
This is no short-term impulse to dump dollars or a pressure tactic by the countries of Eurasia. It’s the beginning of a global tectonic shift away from a sole financial center to many regional or ‘multipolar’ centers over the next decade. As the trillions of dollars of US taxpayer bailouts have demonstrated, try as they might, Humpty Dumpty, the Dollar System can’t be put together again, as it was even three years ago. Wrong economic policies, decisions taken more than four decades ago in Washington and Wall Street, have reached their relative limits. The world is in what Joseph Schumpeter once called ‘creative destruction.’ The consequences for the future of Eurasia are enormous.
